Public Pensions & Pension Deficits New Ideas New Solutions?

1. Public Pensions & Pension DeficitsNew Ideas New Solutions? Atlantic Connection 2013, Miami, Florida Presented by: Marcia Tam-Marks, FSA

2. Introduction and Outline • Public pensions? • Pensions for Government Employees (Public Servants) • Social Security • Financing options • Funded levels of public sector plans in Canada • Benefit design / contribution levels - Caribbean • Liability profile and gain and loss analysis of sample plan

3. Financing Options • Pay As You Go • Benefit payments are part of annual expenditure • It is usually not pre-funded • Vulnerable to increase in pensioner / active ratio • As plan matures cost increases • Unless the return on investments exceeds the GDP growth rate pre-funding does not reduce the fiscal burden (applies to public sector plans)

4. Financing Options • Funded plans • Relies on a pension fund, productively invested, to pay for the benefits of retired members. • Vulnerable to low interest rates, disappointing stock market performance, increasing inflation, longevity, etc. • Contribution rates must be increased to sustain benefits or investment earnings must fund the balance of the cost. • Some public sector plans are partially funded by design. • Initial unfunded liability at start of plan which continues unless there is a plan to eliminate the deficit – lump sum payments, increasing contributions

5. Global Financing Source: Civil-service Pension Schemes around the World, Robert Palacios & Edward Whitehouse, World Bank May 2006.

6. Conclusion of a World Bank Discussion Paper “The civil service pension schemes tend to be more generous and less financially viable than those covering the rest of the formal sector. Taking the scope of coverage into account, they are also more expensive. Costs have spiraled in many countries as the schemes have matured and past promises have come due. Most projections show that the situation will worsen without reform, raising concerns about possible crowding out of important social programmes.” Civil Service Pension Schemes Around the World, World Bank Discussion Paper, May 2006.

7. Funding Level of 85 Public Sector Plans (84 Canadian and one Caribbean) • Source: Morneau Shepell Limited Pensions Database

8. Statutory Early Minimum retirement age retirement Vesting Period * (Current Law)* age * Canada 65 60 r United States 67 62 10 Antigua and Barbuda 60 - 10 Barbados 65 60 10 Bolivia 65 - - Dominica 60 - 10 Grenada 60 - 10 Guyana 60 - 15 Jamaica 60/65 - 28.86 St. Kitts and Nevis 62 - 10 St. Lucia 63 60 13 St. Vincent and the Grenadines 60 - 10 Suriname .. .. Trinidad and Tobago 60 - 15 Notes: Not available: .. Not applicable: - r: Qualifying conditions require a certain number of year of residence p: Qualifying condition are measured in terms of points which are gained through accruing years of contribution. Qualifying Conditions (Source: World Bank pension database at http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTPENSIONS/0,,contentMDK:23231994~menuPK:8874064~pagePK:148956~piPK:216618~theSitePK:396253,00.html)

9. Contribution Rates and Scheme Design(Source: World Bank pension database at http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTPENSIONS/0,,contentMDK:23231994~menuPK:8874064~pagePK:148956~piPK:216618~theSitePK:396253,00.html)

10. Population + 65 /(Working Age Population) Public pension spending 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Recent Year (% GDP) Canada 18.5 18.5 18.6 18.7 18.8 18.9 19.1 19.3 19.6 19.9 20.3 2009 4.50 United States 18.7 18.7 18.6 18.5 18.5 18.5 18.6 18.7 18.9 19.1 19.5 2010 6.80 2006 2.5 Antigua and Barbuda 2006 4.00 Dominica Barbados 14.6 14.5 14.4 14.4 14.3 14.2 14.1 14.1 14.1 14.2 16.0 Dominican Republic 8.3 8.5 8.6 8.8 8.9 9.1 9.2 9.3 9.5 9.6 10.0 2009 0.69 2006 2.00 Grenada 13.3 13.0 12.8 12.5 12.3 12.0 11.7 11.4 11.1 10.8 11.0 Guyana 7.9 8.1 8.3 8.5 8.8 9.0 9.1 9.2 9.3 9.4 6.9 2010 0.07 Haiti 7.1 7.2 7.2 7.2 7.2 7.3 7.3 7.3 7.3 7.3 7.4 Jamaica 12.5 12.6 12.6 12.7 12.7 12.6 12.6 12.5 12.4 12.3 12.4 2009 0.12 St. Kitts and Nevis 2006 2.70 St. Lucia 12.6 12.2 11.9 11.5 11.1 10.8 10.6 10.4 10.3 10.2 10.0 2006 1.70 St. Vincent /Grenadines 11.2 11.2 11.2 11.3 11.2 11.1 11.0 10.7 10.5 10.2 10.2 2006 1.50 Suriname 9.0 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 9.9 Trinidad and Tobago 8.7 8.6 8.6 8.7 8.7 8.8 8.9 9.0 9.1 9.3 9.6 2010 4.35 Dependency Ratios(Source: World Bank pension database at http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTPENSIONS/0,,contentMDK:23231994~menuPK:8874064~pagePK:148956~piPK:216618~theSitePK:396253,00.html)

11. Pension Spending to GDP (World)(Source: World Bank pension database at http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTPENSIONS/0,,contentMDK:23231994~menuPK:8874064~pagePK:148956~piPK:216618~theSitePK:396253,00.html)

12. Situation of Schemes and Focus • Many public pension schemes face difficulties due to demographic and economic factors. • For civil service pension the focus should be on sustainability since most are unfunded. • Contributory social security schemes are mainly partially funded so the focus should be on contribution stability.

13. Some Causes of Unfunded Liabilities • Low than expected investment returns • Lower than expected post-retirement mortality • Non-compliance • Original unfunded or partially funded design • Government Fiscal Deficits • Administrative Inefficiencies • Disconnect between benefit improvements and contribution rate increases • Maturing plan profile • Reciprocal agreements

14. Range of Caribbean NIS Pension Benefits / Contributions • Source: International Social Security Association (ISSA) Country Profiles at http://www.issa.int/Observatory/Country-Profiles

15. Liability Profile of a Sample Pension Plan

16. Funded Position of the Sample Pension Plan

17. Sample Pension Plan Gain and Loss

18. Sensitivity Analysis for Sample Pension Plan

19. New Entrant Cost Example

20. Conclusions • Plan design – be careful when increasing benefits and contributions – consider relationship and impact on funded position – do actuarial costing instead of doing it in isolation • Consider new entrant (n/e) profile – typically contribution rate more than cost of benefits for younger n/e • Longevity risk is real and significant • In addition to interest rates, other plan experience should be consistently monitored to determine sources of gains and losses – early retirement incidence and benefits, increase in longevity, new entrant profile, salary and merit increases, level of indexation etc.

21. Thank You Contact person mtammarks@morneaushepell.com